The hike will boost producers like ONGC. Every dollar increase in gas price results in Rs 4,000 crore additional revenue for the PSU on an annual basis. Image source: Reuters
The Narendra Modi government may raise domestic natural gas price next week to its highest level in two years, a move that will translate into higher CNG price and increase cost of electricity and urea production. Price paid to most of natural gas produced from domestic fields is likely to be hiked to USD 3.06 per million British thermal unit from April 1, from current USD 2.89, sources privy to the development said. Natural gas prices are set every six months based on average rates in gas-surplus nations like the US, Russia and Canada.
India imports half of its gas which costs more than double the domestic rate. The USD 3.06 per mmBtu rate would be for six months beginning April 1 and will be the highest since April-September 2016 when a similar price was paid to domestic producers. The increase in price will boost earnings of producers like Oil and Natural Gas Corp (ONGC) and Reliance Industries but will also lead to a rise in CNG price, which uses natural gas as input. It would also lead to higher cost of urea and power production.
Gas price was last hiked to USD 2.89 per mmBtu for October 2017 to March 2018 period from USD 2.48 in the previous six months. This was the first hike in nearly three years.
The government is also likely to hike the cap price based on alternate fuels for undeveloped gas finds in difficult areas like deepsea, which are unviable to develop as per the existing pricing formula. The price for such fields is likely to be USD 6.5-6.6 per mmBtu for six month beginning April 1 as compared to USD 6.3 currently.
The price hike in October had come after five rounds of reduction, the last being on April 1. As per the new gas pricing formula approved by the NDA-government in October 2014, gas prices are to be revised every six months.
The increase in natural gas prices will mean higher raw material cost for compressed natural gas (CNG) and natural gas piped to households (PNG). It would also mean higher feedstock cost for power generation and manufacturing of fertilisers and petrochemicals.
Prior to the October 2017 hike, rates were cut marginally to USD 2.48 per MMBtu effective April 1, 2017 from USD 2.5 per MMBtu previously. Prior to that prices were cut by 18 per cent with effect from October 1, 2016. That had followed a 20 per cent reduction to USD 3.06 in previous April. The price of gas between October 1, 2015 and March 31, 2016 was USD 3.81 per mmBtu and USD 4.66 in prior six month period.
The hike will boost producers like ONGC. Every dollar increase in gas price results in Rs 4,000 crore additional revenue for the PSU on an annual basis. ONGC is the country's biggest gas producer, accounting for more than 70 per cent of the 90 million standard cubic meters per day current output.
All of its gas as well as that of Oil India Ltd and private sector RIL's KG-D6 block are sold at the formula approved in October 2014. This formula, however, does not cover gas from fields like Panna/Mukta and Tapti in western offshore and Ravva in Bay of Bengal.
The government had in October 2014 announced a new pricing formula that calculated local rates by using prevailing price in gas surplus nations like the US, Russia and Canada.
As per the mechanism approved in October, 2014, the price of domestically produced natural gas is to be revised every six months using weighted average or rates prevalent in gas-surplus economies of the US/Mexico, Canada and Russia.
Indian gas prices are calculated by taking weighted average price at Henry Hub of the US, National Balancing Point of the UK, rates in Alberta (Canada) and Russia with a lag of one quarter.
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So, the rate for April to September is based on average price at the international hubs during January to December, 2017.
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